Law and You > Business Laws > Indian Contract Act, 1872 > Damages under the Indian Contract Act,1872 (S. 73)
In contract law, a breach of contract occurs when one party fails to fulfill its obligations as specified in the legally binding agreement or contract. It means that one or more parties involved in the contract fail to perform their duties, provide goods, or deliver services according to the terms and conditions laid out in the contract. When a breach of contract happens, the injured or aggrieved party may be entitled to seek remedies or damages for the losses they suffered as a result of the breach. In this article let us discuss provisions for damages under the Indian Contract Act, 1872
Types of Breach of Contract:
Breach of contract may be:
- Actual Breach of Contract ,or
- Anticipatory or Constructive Breach Of Contract.
Actual Breach of Contract:
It is non-performance of the contract on the due date of performance. For example, A Is to supply certain goods to B on 1st January 2024. On 1st January 2024, A doesn’t supply the goods. He has made actual breach of contract. It may take place as:
- At the time when the performance is due: breach of contract occurs, when at the time when the performance is due one party fails or refuses to perform his obligation under the contract.
- During the performance of the contract: Actual breach of contract also occur when during the performance of the contract, one party fails or refuses to perform his obligation under the contract.
Anticipatory Breach of Contract:
Anticipatory Breach of contract occurs when a party to the contract without lawful excuse does not fulfil his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. It confers a right of action for damages on the injured party. For example, if A informs B on 1st December that he will not perform the contract on 1st January next, A has made anticipatory breach of contract.
Modes of Breach of Contract:
- Failure to Deliver Goods or Services on Time: If a supplier agrees to deliver goods by a specific date but fails to do so, it is a breach. For example, a vendor promises to deliver materials by March 1, but they arrive on March 15, disrupting the buyer’s operations.
- Non-Payment for Goods or Services: If a client fails to pay an invoice by the agreed-upon deadline, it’s considered a breach. For instance, a client hires a contractor to renovate their kitchen, but after the work is complete, the client refuses to pay.
- Substandard Performance: When a party performs their duties, but not to the standard agreed upon, this is a breach. For example, a contractor is hired to build a pool but completes it with materials that weren’t specified in the contract, compromising its quality.
- Misrepresentation or fraud: Misrepresentation or fraud happens when one party lies or hides essential information during the contract formation or negotiation.
- Violation of Confidentiality Agreement: If an employee or business partner discloses confidential information they agreed to keep private, this is a breach. For example, an employee shares trade secrets with a competitor after signing a non-disclosure agreement.
Remedies for Breach of Contract:
- Suit for Damages (S. 73 ICA)
- Suit for Rescission (S. 75 ICA)
- Suit for Quantum Meruit
- Suit for Specific Performance
- Suit for Injunction
Compensation for Loss or Damage Caused by Breach of Contract (S. 73 ICA):
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.—When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation
In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
Illustrations:
(a)A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered.
(b)A hires B’s ship to go to Bombay, and there take on board, on the first of January, a cargo, which A is to provide, and to bring it to Calcutta, the freight to be paid when earned. B’s ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense.
(c)A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation, the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.
(d) A contracts to buy B’s ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise.
(e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived.
(f) A contracts to repair B’s house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract.
(g) A contracts to let his ship to B for a year, from the first of January, for a certain price. Freights rise, and, on the first of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the first of January.
(h) A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price than that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. B must pay to A, by way of compensation, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it.
(i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A’s mill informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.
(j) A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at 80 rupees a ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron, and B, in consequence, rescinds the contract. C must pay to A 20,000 rupees, being the profit which A would have made by the performance of his contract with B.
(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been then communicated to A), and is compelled to make compensation for breach of that contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation.
(l)A, a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the first of January, it falls down and has to be re-built by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. A must make compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C.
(m)A sells certain merchandise to B, warranting it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimbursed this sum by A.
(n)A contracts to pay a sum of money to B on a day specified. A does not pay the money on that day, B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to the day of payment.
(o)A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a certain price. B afterwards, before the first of January, contracts to sell the saltpetre to C at a price higher than the market price of the first of January. A breaks his promise. In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale to C, is to be taken into account.
(p)A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B’s mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.
(q)A contracts to sell and deliver to B, on the first of January, certain cloth which B intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B is entitled to receive from A, by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparation for the manufacture.
(r)A, a ship-owner, contracts with B to convey him from Calcutta to Sydney in A’s ship, sailing on the first of January, and B pays to A, by way of deposit, one-half of his passage-money. The ship does not sail on the first of January, and B, after being in consequence detained in Calcutta for some time and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. A is liable to repay to B his deposit, with interest, and the expense to which he is put by his detention in Calcutta, and the excess, if any, of the passage-money paid for the second ship over that agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too late.
Suit for Damages:
Damages include monetary compensation given to the injured party for the loss or injury suffered by him due to the breach of contract. The purpose behind providing damage for breach is to put the injured party into the position in which he would have been if there had been performance instead of breach and would not further punish the defaulter and this is considered as the primary aim or principal of the law of damage. A claim for damage arising out of the breach of contract whether for general or liquidated damage remains a claim till it is adjudged by court and awarded by the court as debt.
In Hadley v Baxendale Alderson the Court laid down that where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be as may fairly and reasonably be considered either arising naturally i.e. according to the usual course of thing, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contracts, as the probable result of the breach of it.
Kinds of Damages:
- General Damages: General damages occur when a contract has been broken the injured party can always recover general damages from the defaulter, as per the rule and are such kind of damages that arises or may arise fairly and reasonably from usual course of thing naturally from the breach of contract. General damage in contract includes difference between contract and market price and also difference between the value of good as delivered and as warranted and interest on money that has been wrongfully withheld
- Special Damages: These are those damages which arises due to unusual circumstances affecting the plaintiff but not due to breach of contract. They are not easily recoverable until and unless they are brought to the knowledge of the defendant. No recovery of special damages when special circumstances not known. Lack of knowledge of special circumstances also prevented recovery of special damages. Special damages include all kind of damages. Losses flowing out of the breach of contract could be compensated for as special damage.
- Exemplary or Vindictive Damages: These are such damages which are awarded as a punishment to the guilty party for the breach of contract but not by way of compensation. The cardinal principle of law states that if damage is occurred to the party due to the breach of contract it must be compensated to the injured party by the defaulter and there is no mention that the defaulter has to be punished.
- Nominal Damages: These are such damages which are awarded for name sake. They are neither to be considered as compensation to the injured party nor to be awarded as punishment to the defaulter party. The purpose of this award is to establish a right to decree for breach of contract when the party hasn’t actually suffered any real damage. It consists of very small sum of money say a rupee or two as compensation.
- Liquidated Damages: It means that sum is fixed in advance to the probable loss that would be the result of such breach. In other words, they have been agreed and fixed by the party or it is the sum which was agreed by the parties under a contract as payable on default of one of them. Section 74 of The Indian Contract Act, 1872 applies.
- Unliquidated Damages: Where the courts instead of parties to the contract determine the damages to be paid by the defaulting party; such damages are known as unliquidated damages.
- Substantial Damages: It refers to damage which brings actual economic loss or for which compensation in a substantial amount is awarded.
- Aggravated Damages: They are such types of damages which are ordered to be paid by the defaulter party for the mental stress or agony that occurred to the plaintiff due to the breach of contract.
- Consequential Damages: They are the other type of damage which are consequent or the result of any physical damage that occurred to the party claiming for the loss.
- Incidental Damages: They refers to the harm or injury that occurred to the plaintiff after knowing the breach of contract; for instance- the cost of buying or replacing or returning the goods became defective.
- Pecuniary Damages: They are those which can be quantified by the court by assessing the loss or injury suffered by the plaintiff.
- Non-Pecuniary Damages: They are those losses or injury which cannot be directly or clearly quantified or determined because the loss in such cases is more subjective.
- Damages for Loss of Profit/Opportunity: The idea behind providing compensation for this loss is that the plaintiff should be given compensation for the deprivation of profits that occurred due to some act of the defendant.
Principle of Remoteness of Damages:
The principle of remoteness of damage in contract law plays a critical role in determining the extent to which a party is liable for damages arising from a breach of contract. It helps distinguish between losses that are recoverable and those that are too remote or unforeseeable to warrant compensation. The doctrine ensures that a defendant is only liable for the consequences that are reasonably foreseeable at the time of contract formation, thereby preventing disproportionate and unfair liability.
In Hadley v. Baxendale (1854) case, where a mill owner (Hadley) who contracted with a carrier (Baxendale) to deliver a broken crankshaft to a manufacturer for repairs. Baxendale delayed the delivery, which in turn delayed the reopening of Hadley’s mill. Hadley sought to recover lost profits caused by the delay, but the court ruled that these damages were too remote, as Baxendale could not have reasonably foreseen the specific financial losses resulting from the delay. In its judgement, the court established the two-part rule for assessing remoteness of damages:
- Natural Consequences: Damages that arise naturally from the breach of contract in the usual course of things are recoverable.
- Special Circumstances: Damages that arise from special circumstances must be within the reasonable contemplation of both parties at the time the contract was made.
This decision laid the groundwork for how courts determine which damages are too remote to be compensated.
The principle of remoteness in contract law is inherently tied to the concept of foreseeability. Courts must assess whether the losses claimed by the aggrieved party were reasonably foreseeable at the time the contract was entered into. This analysis depends on the knowledge available to both parties at that time, as well as their understanding of the risks involved in the transaction.
Conclusion:
Damages are primarily compensatory, aimed at restoring the injured party to the position they would have been in had the contract been performed. The principle of remoteness is crucial, where only losses that are a natural result of the breach or those that were contemplated by both parties at the time of the contract can be claimed. The injured party has a duty to mitigate their losses, meaning they should take reasonable steps to minimize the impact of the breach. Courts have discretion in assessing damages, taking into account the circumstances of each case, the intentions of the parties, and the nature of the breach.
In summary, the Indian Contract Act, 1872 provides a structured approach to damages, balancing the need for compensation with the principles of fairness and reasonableness in contract enforcement. This legal framework aims to ensure that parties are held accountable for breaches while allowing for a degree of flexibility in judicial discretion.